International Paper Co (IP) 2015 Q3 法說會逐字稿

Good morning. My name is Patrick and I'll be your conference operator today. At this time, I would like to welcome everyone to the International Paper third-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Jay Royalty Vice President, Investor Relations. Jay, the floor is yours.

Thanks, Patrick, and good morning, everyone, and thank you for joining International Paper's third-quarter 2015 earnings conference call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer, and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide 2 of the presentation. Will also present non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website.

Our website also contains copies of the third-quarter 2015 earnings press release and today's presentation slides. Lastly, relative to the Ilim JV, slide 4 provides context around the joint venture's financial information and statistical measures. With that, I'll turn the call over to Mark Sutton.

Thanks, Jay, and good morning, everyone. Thank you for joining us this morning to review our third-quarter results and our outlook for the fourth quarter. I'm going to start on slide 5.

International Paper delivered another quarter of strong results with earnings per share of $0.97 in the third quarter. Earnings were driven by outstanding results in our North American Industrial Packaging business, with EBITDA margins of 25.2%. Solid performance continues at the Ilim joint venture, resulting in record operational EBITDA in the quarter. Additionally, IP received a $35 million dividend from Ilim in the third quarter, and finally, our return on invested capital continues to be strong, with year-to-date results about 10%.

On capital allocation, we increased our dividend by 10% to $1.76 per share effective with the fourth-quarter payout. Along with that, we revisited and improved our dividend payout guidelines. Also, we completed the restructuring and are extending the 2006 timber monetization. Carol will share more on these important items later in the call.

And finally, we recently made a significant strategic decision that impacts how we will serve the important Asian market moving forward. Relative to closing the deal to sell our stake in the Sun joint venture, we have received the required government approvals and we expect to fully close the deal in the fourth quarter.

Moving to slide 6, and continuing with our financial results, revenue was down year-over-year in the quarter, as it has been all year. Primarily, this is due to the impact of FX translation. We also took a large non-cash accounting charge of $0.15 during the quarter due to the decline in the value of the Russian ruble versus the dollar, and that is primarily on Ilim's US-denominated net debt. More importantly, or most importantly, I should say, we had a strong EBITDA quarter at $1.1 billion, and with margins above 19%, strong free cash flow of $512 million, and a return on invested capital of over 10%.

So a good quarter, and with that, I'll turn it over to Carol and ask her to cover the details on the quarter, also our outlook for the rest of the year, and some comments on capital allocation. I'll return at the end to wrap up the call before we go into Q&A. Carol?

Thanks, Mark. Good morning, everyone.

Taking a look at the bridge from the second to third quarter, you can see that our performance overall was fairly consistent quarter-over-quarter. The largest changes involved a non-cash charge associated with the Ilim JV's US dollar-denominated net debt, and that was due to the significant decline in the value of the ruble during the quarter.

This more than offset the benefit of lower planned maintenance outage expense. Pricing was impacted by lower containerboard export pricing and unfavorable price mix on coated paperboard and papers. Overall, across the businesses, volume was generally flat.

We had solid operations in the quarter, and as expected, input costs were higher in the areas of energy, OCC, and rail expense. The Other category includes a favorable FX gain from Brazil, and as mentioned earlier, the Ilim JV performed very well, with strong operations that positively contributed $0.04 per share.

Turning to the segments on slide 8, Industrial Packaging continued its string of strong quarterly results, delivering $553 million of EBIT. Lower planned maintenance outage expense was the biggest driver of increased earnings in the quarter. Export containerboard prices continue to be under some pressure, and we believe this is primarily due to the strong dollar.

Volume was impacted by lower containerboard export tons and seasonal softness in Europe. Absolute box volume in our North American box business was flat. Operational performance was solid and input costs were higher, as I mentioned, as we expect.

Turning to slide 9, IP continues to enjoy industry-leading margin performance, as Mark mentioned, driven by the excellent execution of our North American Industrial Packaging team. This includes their commercial efforts. As you can see, on the top right portion of this slide, we've made significant progress in closing the gaps to industry box shipments over the last two quarters.

This is due to new business wins we're securing, growth with our existing customers who are winning in their respective segments, and our significant presence in segments which are growing faster than the industry average. As you can see, at the bottom of the slide, we're seeing positive growth trends in online retail and distribution, agricultural products, and beverage.

Protein is a segment that's important to us and that has recently struggled, but it is showing signs of resumed growth. Processed foods is a large segment that continues to be challenged, as consumer preferences are shifting. But overall, we are encouraged by our results and the trends we are seeing as we move into the fourth quarter.

Turning to the Consumer Packaging, earnings were higher due to lower planned maintenance outage expense and improved operation. While volume was up slightly in both North America and Europe, it was weaker than we expected for this time of year. We did experience softer backlogs in North America, which we view as a result of customer destocking across the industry. We also experienced some price pressure on plate stock, along with a less favorable mix in North America.

Turning to slide 11, it was a very good quarter for our Printing Papers business, with earnings up $78 million. We had seasonally stronger volume, lower planned outage expense, and stronger operations, and these were the key drivers. This was partially offset by lower price mix in North American paper, a bit less favorable pulp mix, and an increase in Russian exports.

Looking at slide 12, I'd like to take a minute to highlight a business that really shows the strength of our key competitive position, and that's our Brazilian paper business. As we all know, Brazil faces a host of challenges right now as it's in the midst of a very deep recession. What gets lost relative to IP is the fact that, despite the current situation, our papers business continues to perform very well and continues to generate strong EBITDA margin, above 30%.

Despite the weak domestic economy, we've implemented one round and are working on a second round of domestic price increases, which are helping to offset weak domestic demand, as well as increased inflation. Additionally, our export position is stronger than ever due to our strengthened competitive position and the benefit of the currency devaluation to our cost position. We expect to build on the momentum we saw in the third quarter as we move through the fourth quarter, as volume seasonally strengthens and we implement the second round of domestic price increases.

Turning to Ilim, the JV delivered record operational EBITDA, as Mark mentioned, in the third quarter, and this was all around strong operations and increased volume. Production at the Bratsk mill was at a record level in the third quarter, exceeded the capital project targets that we had set. As noted earlier, the JV did take a large non-cash charge in the quarter for the decline in the value of the ruble, primarily related to the JV's US-denominated debt.

As Mark mentioned, we did receive a dividend payment from the JV in the quarter of $35 million. Looking ahead, the JV is expecting seasonally higher volumes to be offset by lower average pulp prices and higher input costs for the fourth quarter.

Moving to the fourth-quarter outlook, volume in North America will be lower due to primarily three less shipping days in the North American box business and seasonally lower specialty sales. This will impact North American Industrial Packaging results by about $35 million.

Volume will also be impacted by fewer shipping days in North American Consumer Packaging. We expect seasonally stronger volume, as I mentioned, in the Brazil paper business. We expect pricing to be relatively stable for the businesses, however, we do see a less favorable seasonal mix across our North American paper, pulp, and packaging businesses.

Operational cost will be a headwind in the quarter relative to the third quarter. Part of this stems from the flooding that we saw in South Carolina earlier this month, which impacted both our Eastover and Georgetown mills. Additionally, with the lower demand expected in North America due to fewer shipping days, combined with starting to move into the winter months across the US, operational cost will be higher, as will energy expenses.

We expect the impact of the North American paper and pulp business to be roughly $25 million, and that does include the impacts from the flood and the operational impact that had. We expect similar seasonality issues to impact the North American packaging business by roughly $20 million.

Relative to input costs, we expect energy expenses for the North American businesses to be about $10 million higher in the fourth quarter. Maintenance outage expense will include increase collectively by $45 million as shown on the side. As always, we provide an outlet for Ilim assuming stable FX coming out of the quarter, so the fourth-quarter outlook assumes a non-repeat of the $0.15 charge we incurred in 3Q.

Shifting gears, before I turn it back over to Mark, I'd like to provide an update on capital allocation and how we think about this important area. This has been a consistent message and we've continued to refine our thinking and our approach relative to driving the greatest value for IP and for our shareholders. To start, of course, cash from operations enabled IP to fund all of these important elements, so our focus continues to be on maximizing cash generation.

Looking at the top left portion of the slide, one of the most important aspects of our capital allocation philosophy is to systematically return a significant portion of our cash to shareholders. As Mark mentioned, we've revisited the trough test for our dividend, and based on a higher level of confidence around the sustainability of our cash flow, we have increasing target payout from the previously noted 30% to 40%, now to 40% to 50% of our free cash flow.

Opportunistic share buybacks, as we been doing since we instituted the first authorization roughly two years ago, remains a very important part of this element of our strategy. Thoughtful and effective capital spending is another critical element. We're generating strong results and are committed to running a socially responsible Company.

To maintain that level of excellence requires a baseload of maintenance and revelatory spending. Beyond that, we look at high-return cost reduction projects that help to offset inflationary costs and then enable IP to maintain and increase our competitiveness.

Next, we intend to maintain a strong and healthy balance sheet and that includes an investment-grade credit rating. We believe this is important to maintain the financial strength and flexibility needed both through the good times and the not so good times.

Finally, we continue to look for ways to increase the value of IP through reinvestment. This is all about opportunities that have healthy spreads above our cost of capital, and importantly, improve IP's strategic position.

Given that cash from operations funds the important elements of our capital allocation strategy that I just spoke about, slide 16 shows our cash from operations annually since 2008. We have been generating significant cash, and combined with our thoughtful approach to CapEx, this has allowed us to maximize free cash flow.

Turning to an update on our capital allocation activity in the quarter, let's talk about a number of these items. As mentioned, we recently increased our dividend by 10%, effective with the fourth-quarter payout, to $1.76 per share annually. This marks our fourth consecutive annual double-digit increase since the fall of 2012.

As I mentioned, we strengthened our policy to move the target payout range up to 40% to 50% free cash flow. Share buyback remains an important part of our capital allocation strategy. We bought 151 million of shares in the third quarter, which has brought our year-to-date total to 423 million, and our total since September of 2013 to almost 1.9 billion.

Moving onto the next item, as we have previously disclosed, we needed to take action this year regarding the loan agreements associated with IP's sale of the timberlands back in 2006. Our objective was to reduce IP's risk and preserve financial flexibility, while maintaining the deferral of $1.4 billion in taxes. We took a series of successful actions during the third quarter to achieve those objectives.

It's important to first remind everyone on the context around this and then walk you through in a bit more detail than I might normally do, the details of what we accomplished in the third quarter and what we plan to do in the fourth quarter. As you know, we sold some of our timberlands in 2006 for $4.85 billion in an installment sale, which resulted in a deferral of $1.4 billion in taxes on the proceeds from that sale.

The 2006 structure was up for extension renewal later this year and into 2016, so we thoroughly evaluated not only an extension of the structure, but also restructuring options that would reduce IP's exposure to bank risk, while continuing to maintain the $1.4 billion tax deferral. Ultimately, we moved forward in the third quarter with the restructuring, which provides IP with benefits and flexibility going forward.

Third-quarter restructuring will be followed in the fourth quarter with a five-year extension of the new structure. The original structure was full recourse, meaning that we pledged not only the timber notes but also $4.85 billion in IP debt obligations as collateral for the bank loan. A lot has changed since we put the original structure in place, making this type of structure no longer the most prudent for International Paper.

So we made the decision to move to a limited recourse structure. The first step in this process was to buy out our third-party equity investor for $198 million. That investor was necessary in the original structure, but was no longer needed in the new structure. Additionally, moving to the new structure allowed us to eliminate $150 million of debt from our balance sheet.

The most significant requirement in the move from full to limited recourse was to adequately collateralize the $4.85 billion of bank loans. To accomplish that, we made a $630 million payment against those loans, which comes back to IP when we receive the cash from the timber notes. As a result of moving to limited recourse, the assets and liabilities associated with the structure have come onto our balance sheet in the third quarter, which is similar to the treatment we have with the Temple-Inland timber monetization.

In the fourth quarter, we will work to put permanent financing in place for the five-year extension, and following the five-year extension, the monetization structure can be extended up to an additional 15 years. So to summarize, a tremendous amount of work was accomplished in the quarter.

We set the stage for completion of the five-year extension of the timber monetization, which really allows us to keep the option up to an additional 15 years. The new structure eliminates IP's exposure to significant risk and it maintains the $1.4 billion tax deferral.

Going back up to the side and moving on to capital spending, we have set the 2016 plan at $1.4 billion, which will include spending related to the projects we announced last quarter for the North American Industrial Packaging system, as well as the Riegelwood fluff pulp conversion project.

Finally, as you know, on October 8, we announced our decision to sell or stake in the Sun JV to our partner for $23 million. Importantly, the deal also includes the removal of roughly $400 million of JV debt off of IP's consolidated balance sheet. As Mark mentioned earlier, we've made a lot of progress towards the close and expect to finalize everything shortly.

So with that, let me turn it back over to you, Mark.

Thanks, Carol, for taking us through all those details and the very important elements of capital allocation.

I feel good about our capital allocation strategy and the work we accomplished in third quarter. It was a busier than normal quarter on that front. These were the right moves for IP and I'm really confident about our path ahead.

What I would like to do, though, on slide 18 of put a little more context around our strategic decision relative to Asia, and what we see as a continued important market for IP. You've heard me say this before. We've be looking at China for a while, we serve it many different ways, and we reached a conclusion that serving Asian in all those ways that we have in the past is really no longer the best strategy to maximize value for IP.

So we decided to exit the on-the-ground manufacturing we do in China for coated paperboard, as well as our Industrial Packaging box business. That's both in China and Southeast Asia, the box businesses. We'll continue to serve customers, though, in this really important region in a variety of ways.

In ways that are working very well today, including exports from our Ilim joint venture for softwood pulp and selects exports from the US of globally competitive products like our craft linerboard and our fluff pulp. So China and Asia remain important to us. We're willing to reevaluate how we serve the markets as we go through time, and that's what we did in this case. This is a significant decision for the Company and one that makes IP even stronger and more valuable.

On the last slide before we go to Q&A, on slide 19, in closing, I'd like to turn to the investment pieces for the International Paper. We've built a portfolio with strong competitive positions in key select markets, where International Paper has a right to win. If we execute well, we have a right to win. I like our portfolio and will continue to look for opportunities to refine it and improve the Company as we move forward.

Our strategy is enabling us to achieve an increased return on invested capital above our cost of capital and we've been doing this for the last five years. So we're really convinced that we can sustainably continue to generate these type of returns and continue to improve the Company.

We are also generating, and Carol mentioned this, it's really critical that we focus on the cash flow element of our Company so that we can find our capital allocation strategy. Again, we are proving that we can generate strong sustainable free cash flow year in and year out across the Company.

Finally, we are focused on thoughtful capital allocation, which you just had a detailed view of on Carol's last slide, that's based on the principles of creating value, rewarding our shareholders, and making International Paper a better Company that you can count on for the long term.

And with that, I'd like to turn it back over to the operator, and we will open up the floor for Q&A.

(Operator Instructions)

Chris Manual, Wells Fargo.

Good morning, gentlemen. Thanks for the color and all the components here. Just taking a step back, Mark, over the last, say, 12 months or so, you've done a number of actions, mostly deletes or cleaning up elements of the portfolio. As you sit today, do you feel that you're largely done with what you want to do with the portfolio?

Are there components in the business that look particularly attractive to that you feel you'd want to be adding or looking at? So with respect to how you're thinking about acquisitions or the portfolio was a whole as it sits today?

That's a great question and some of what you do naturally over time is what we've been talking about in the last year, which is refining the portfolio, recognizing that sometimes everything we are trying to do isn't working the way we thought it would be. That will be a continued element of how we look at the Company.

But I would remind you, though, that we've not just taken some things out, we've also reinvested in a pretty big way, and it's paying dividends into our Industrial Packaging business. It doesn't get the same press as an acquisition, but making that business even stronger through improving our operations on the box side, as well as the mill side, has had a pretty good effect and we have got more to do there.

I mentioned in my comments, I like the portfolio, but by no means does that mean there won't be any more changes. The changes will come against our filter of can we make the Company stronger and create more value and generate more cash that we can then fund our capital allocation strategy through.

So on M&A, I've said this before, M&A is obviously a part of your strategy in any company, but again, against our filter of creating value and doing things that increase the return on invested capital with a good spread above our cost of capital would be to first place to start. Obviously, the industrial logic of what we do and do well has to fit as well.

And as a follow-up, if I could, as I look at -- you've got a slide here where you highlight downtime that you've taken across most of your mills and such. When we think about downtime in North America, with significant amount of -- there's been some chunks of new capacity come on stream, there's been even more chunks of capacity that have come out.

How do you think about the market as it sits today? Is it relatively balanced to you? Do you feel it? As I look, over the past three years, you've taken downtime in all but one of the quarters. Do feel that you're about done needing to take downtime, or perhaps, do you evaluate maybe taking a little capacity out yourself?

Chris, that's a great question. This is a statement across all of our businesses. We run the operations based on our order book and our capacity, given outages and all of those things, doesn't perfectly match our demand. Demand seasonality and capacity seasonality are somewhat out of phase in our business.

We've limited that over time. The containerboard business has gotten really good at it because we have so many mills. But we're going to make the products, and all those businesses that we have orders for and that we need, that's what yields the amount of downtime we take. What we've learned to do, though, is take that downtime on a marginal cost basis and do it pretty efficiently.

We are no longer practicing paper making from yesterday, where the only way you make money is if you run everything wide open to its engineering limit. We've now improved our system enough where we can run our business and our manufacturing facilities to the market demand we have and be profitable doing it. We continue to work to get better at that because that's a real important element of having the kind of Company that we try to create: flexibility and the ability to match the orders we have any quarter, any month, or any year.

Thank you.

Mark Weintraub, Buckingham Research.

Thank you. Maybe following up a little bit on that. You gave, in terms of the outlook, you gave guidance indications on the impacts from volume, impacting, you talked $35 million per volumes, and you talked about the operations in paper and packaging input costs, mill, maintenance, et cetera.

Summed up something like $135 million, $140 million, which would suggest in the low $0.20. First of all, would that be about right in terms of the impacts from those elements and would -- other than the Ilim coming the other way, would there be anything else significant? And related to that, does that capture the expectations of the seasonal type of downtime that you might take, which you were just referring to and if you could help us out there?

Yes, Mark. It's Carol. For sure what we were attempting to do was to highlight that seasonality because that's a lot of what you're seeing there. It's about the days, it's about that time of year, it's about the order patterns that we see, and since the third quarter is a strong quarter traditionally, the fourth quarter tends to be seasonally weaker quarter, and that's -- you captured it.

Okay. Then just one quick follow-up. On the uncoated freesheet business, now we've seen the countervailing duties in place for a little while. What if any implications has that been having for the North American market and then, in your case, to what you do in Brazil?

Hey, Mark. This is Mike Amick. Just real quickly on that. It's still real rather fluid in terms of the market, as we see changes in the dynamics that are happening with regard to imports. As they take effect, they are still preliminary, the final duties will come in, in February.

As you saw from the stats, some of these are still estimates. We saw a decrease year-over-year in the third quarter by roughly 8,000 tons. The overall market right now, we think is, year-to-date, is roughly down about 1% to 1.5% so this is going to still be somewhat of a moving and fluid over the course of the next several quarters.

With respect to Brazil, and the volume there, we weren't moving a lot of product into this market from Brazil. It was what was coming into warehouses, say, in Miami was going out into other parts of the other parts of Latin America. So from a Brazil standpoint, in the US, that was really not a really big impact.

Okay. Great. So is it fair to say -- because that 1%, 1.5%, that's certainly better than what we had been seeing, so was the -- does the net effect at this point seem to be favorable, at least near-term, on the market?

Yes, Mark. That's a fair statement. Certainly where we've been seeing the 3% to 4% decline, this has been an improvement that we've seen, and as far as International Paper goes, we've done a little bit better than that.

Great. Thank you.

Alex Ovshey, Goldman Sachs.

Thank you. Good morning, everyone. Couple of questions. Maybe going back to just [inventory versus] supply and demand in the US. Can you talk about how you're seeing demand thus far in the quarter, how you're thinking about your inventory position relative to where you needed to be and just what you're seeing in export markets?

Yes, good morning. It's Tim Nicholls. Actually, demand starting in the fourth quarter is reasonably good. Remember, we are up against a pretty tough comps given how well the market performed last year in August, September, but then continuing through the fourth quarter. So any positive growth, any positive growth, this year in the fourth quarter has to be viewed as a big plus. In October, we are trending positive so right now we are up about 1%, but we're encouraged so far.

In terms of inventory, we grew our inventories from second quarter to third quarter (inaudible) and they are roughly where we wanted them. We did that for two reasons. One, we talked about before, supply chain efficiencies, and the return on carrying a little bit more inventory, more than pays for itself.

But also as we came out of the second quarter, we were just coming out of heavy outage and so we had depleted inventories, built them back in the third to get ready for fourth-quarter outage season. So, I think we're in a good place in terms of our inventories.

Excellent. Thank you Tim. Just last one for me, thinking about capital allocation. A couple of things that you said. One was the investment-grade balance sheet, and two was the deal, most importantly, has to drive return on invested capital above the cost of capital.

So on the investment grade, what's the upper limit around leverage, as you see it? And the return above invested capital, does that mean in the first year, or do you feel as long as you can get to the number by year two, three, or four, you'd still to be willing to look at an acquisition that transformative.

Alex, I'll take the second part, and I'll ask Carol to comment on our debt metrics. On the investment, significant investments, we need to see line of sight to an ROIC that's at the cost of capital pretty quickly in those first, like you said, first two or three years. Then we need to believe we have actionable plan to get it to a spread of maybe 200 basis points above our cost.

It doesn't need to be forever task. You've seen us do that on our big acquisitions, Weyerhaeuser and Temple, for example. We're not going to be perfect but that's really what we're looking at and that's a filter that we are all aligned on and so we see it pretty quickly.

Alex, regarding the investment grade, in our space, 3 times debt-to-EBITDA for us feels comfortable. One of the strengths of International Paper that you have to after member is because our businesses are so well positioned in the markets in their cost position, our cash flow generation, pretty much throughout most conditions, remains very strong.

So we feel comfortable keeping that type of leverage, and as do the rating agencies and the reputation we have with the rating agencies, which we do what we say we're going to do and that has been working well for us.

Excellent. Thank you, Mark and Carol.

Chip Dillon, Vertical Research Partners.

Yes. Thanks and good morning. Just a quick question about the change in the timber transaction from 10 years ago. It's on the balance sheet as a current item. That's because you're going through this transition and I don't think it was there before. Will that be removed from the balance sheet since it's non-recourse and will we continue to see the offsetting entries on the asset and liability side as long-term going forward?

Yes it's in the current because we're in the process of putting the permanent financing in place in the fourth quarter, so we'll put the permanent financing in place in the fourth quarter, and it will move out of perm and then it will be treated just like the Temple-Inland timber monetization is, but you'll see it on the balance sheet.

Okay. Got you. Then second question is on the capital spending. It seems like after the last call in late July, early August, that CapEx for next year was looking to be above the depreciation rate, maybe $1.6 billion, because of the $300 million program in Industrial Packaging and how that was an overt above and beyond investment that you were using with free cash flow, given the returns.

Now it looks like you're guiding down the CapEx for next year from what we would've thought. I know you didn't have an official number the last call. I was wondering what items or how you were able to make those changes and what the thought was behind that decline?

I'm going to take a shot at this and then I'll obviously let Mark comment, but what happened in July is we just were not in our process yet to declare what our 2016 plan was, but we felt it important to communicate to you, to our investors our plans around the business.

And so what we talked about in July was the projects, and agreed that we -- left it open so there could be a change in the 2016 capital, but obviously we do our planning work as we enter this time of year, getting ready for 2016, and we just feel comfortable that we can get the work done that we need to get done on the projects and in the Company with the $1.4 billion, so I don't think it's any more complicated than that, Chip.

And does that included any more Boiler MACT or did that drop off?

It includes what's [in spare] so that includes our regulatory required spending.

Got you. Last quick question is on -- you talked about how China and how obviously, it's an important market, but certainly serving them in the fluff market from the states and in the softwood pulp market and virgin linerboard from Russia, certainly for a lot of reasons make sense, given the fiber situation. Could you make the same argument, or would you, about India or are there differences about India than what you see in China?

Chip, you could make arguments. Obviously, there are different economic barriers at any moment in time, whether its tariffs, supply chain maturity, and all of those things that would allow you to make money serving a market with an important products. The fundamental element is what you just said and that is if you have globally competitive products from a quality standpoint, which we have, and a globally competitive cost position, and in our business it starts in fiber, then if you can access a market that appreciates your products, you should be able to make that work.

You can see examples of that in the forest products industry all over the world. So that's something we always look at, and it goes back to our multi-channel strategy in our containerboard business. We are containerboard providers for the world markets, not just the US market, and we've been doing that for a long time because the product is good and our cost position is good and our service platform is trusted by the customer, so it's definitely a possibility.

Thank you.

Gail Glazerman, UBS.

Hi, good morning.

Good morning, Gail.

Going back to the capital program in Industrial Packaging, is there any further guidance in terms of how that's going to roll out over the next year or two, in terms of both the spending and the incremental capacity that may come with it? Is that in the same timeline that you would've thought last quarter or has that been refined?

Hi, Gail. It's Tim. Yes, it's in line. The changes to how we were thinking is, as you'll remember, we talked about this being the spending that we would begin in 2016 and it would roll into 2017, and no change to anything, the spending or the timeline.

Just reminder Gail, on when Tim covered those projects last quarter, he talked about the drivers of those projects improving the Industrial Packaging containerboard manufacturing system. There's a lot of elements: quality improvement, cost reduction, and if we need it, a volume component, and of course, we will make the volume and consume the volume in our own box plants and in our open market channels, if the demand is there. If it's not there, those are still really good projects from the first two elements of cost and quality.

Okay. And back last fall, when you announced the plans to restart Valliant, you talked about also swinging new board out of medium and more into facing paper. I'm just wondering, you can you give an update on where you stand on that? Have you accomplished it or is that yet to come?

We haven't accomplished it fully. We continue to grow our gypsum product there, and so we are encouraged by the growth that we see, and the contractual obligations that we have going forward. So it's in process and we will continue to work on it. We're trying to do all of this on a very methodical way and eliminate or minimize disruptions.

Okay. Thank you.

Adam Josephson, KeyBanc.

Thanks. Good morning, everyone. One for Tim. Tim, you talked about the October pick-up in US box demand that you're seeing up, up about 1%. Given that industry box demand growth has slowed throughout the course of the year, and given the obvious pockets of weakness evident in the US economy, are you surprised that your shipments are up 1% in October and do you expect that type of growth to continue?

Well it's hard to predict the future in terms of what will happen. As I said, fourth quarter is a tough comp. We had some exposures earlier in the year, that just based on our segment mix, in terms of processed foods and how they have underperformed for a period of time now. Another one that underperformed in the first part of the year -- well, really, right through the third quarter -- has been protein.

Avian flu in poultry and there was a ban on certain countries allowing imported poultry products. Those bans have been lifted. We are actually now seeing a bit of recovery. We hope that will continue through the fourth quarter. So yes, there's -- the economy and your read about manufacturing, what was maybe hurting us a little bit earlier in the year potentially is now helping us.

But one bright spot, we saw our beverage sales pick up in the third quarter, which was a little bit of a reversal of a trend, and so that is a helpful and hopeful sign. The other thing, we have a fairly large exposure to e-commerce and indication so far is that it looks like it has the potential for a really big season in the fourth quarter.

Thanks, Tim. One for Mark. Mark, your EBITDA is down about 4% to 5% year-to-date, and I fully appreciate that emerging markets have been worse than many folks expected. Do you have reason to think next year will be notably different than this year in terms of year-over-year changes in EBITDA, and if so, can you give any sense as to why? Thanks very much.

Thanks, Adam. We obviously intended to improve our EBITDA this year for the reasons you mentioned. We've had some improvement, but we've given it back because of some of the headwinds. We're evaluating our outlook for next year, but we feel good about the level of performance that we have as a Company.

We believe we can sustain that level of performance. The global economy is going to really provide an opportunity to improve or stay the same and we are still evaluating that right now, but we feel good about the level that we are at, and our goal is obviously continue to grow to earnings of the Company.

Thanks a lot, Mark.

Thanks, Adam.

Phil Ng, Jefferies.

Hey, good morning, guys. Can you provide some color on the weakness you called out in North American consumer? Is the pricing slippage pretty much isolated to the plate stock business, and has the downtime you've taken during the quarter pretty much tightened up the market at this point?

Good morning, Phil. This is Mike Amick. What we've seen in the third quarter, as Carol mentioned in her comments, we do think that there is some sluggish demand out there. Most of that is really we think wrapped around destocking through the supply chain. We've seen at our converters, a fair amount of, 3% to 4% pull-down in stocks, that coupled with some already elevated inventories across the industry, we think is explaining a lot of that.

Our volume, we've had a couple of specific accounts around our backlogs, as well as some measured decisions that we took as far back as 1.5 years ago to start focusing and pulling back on some of our export business. And we're going to, as Mark said, we're going to continue with, in this business, as in all businesses, to managed to our order book. So fourth quarter is, in this business, is going to be, a little seasonally challenged, as we note.

I will say on our food service side, and the cup stock business, we're managing through that portion of our business. It is very strong. We've seen some -- having a great year with our shipments up about 6% year-to-date and we've got strong order books in that business. We've just completed the [kitten] footprint expansion, those new machines, and cup converting machines are being deployed now and we're actually operating that new equipment, so we're excited about that portion of our business.

Okay that's helpful. And switching gears back to containerboard, there's been a lot of questions on the call about supply/demand, more short-term nature. But medium- to longer-term, Mark, you've always characterized the market as been balanced. But based on some of the capacity that's coming on and one of your big competitors idling up a fair amount of capacity in the fourth quarter, at least, what's your view on supply/demand going forward?

And just wanted to get some thoughts on the export market. You've seen some [leakage] there on pricing. Does seem like a lot of a lot of your competitors are pulling back in that market. Do you have a sense that prices are going to start stabilizing here or there still some downside risk? Thanks.

Hi. It's Tim. Just on the capacity question, I'm not going to comment on what competitors do with their capacity. We have, up to this point, with capacity additions, been able to manage our way through the whole process with our customers and we're offering a different value proposition than a lot of capacity that's started up over the past two years.

We have good geographic coverage, we have wide product mix, and we a have tremendous capability across our whole system that allows us to sell to customers, providing quality service and product range. On exports, it's been a little bit softer here in late summer, as we ended the third quarter, not much. The surprising thing is, with the strength of the dollar, virgin kraft linerboard exports, the markets we sell to have held up reasonably well through the year.

We said it's a little bit of a question mark, but it says to us there's a need for the product that they are buying as opposed to just general economic conditions for all packaging in the region. So there's a little bit of softness around price, not much, and hopefully it will stabilize through the fourth quarter, but the markets have held up reasonably well this year.

Tim, are mill [nets] pretty much at a point where the decision has to be made whether or not your high-cost capacity makes sense to run and support that export market? I'm just trying a better sense if there's -- we're at a point where export prices stabilizes here? Thanks

We still like our margins on exports.

Okay, thanks.

Phil, another part of your question was around pricing and is that isolated to the plate stock. It primarily is. We're seeing some softness on the folding side, but most of that is isolated to the plate stock business.

George Staphos, Bank of America.

Hi, everyone. Good morning. Thanks for all the details and taking my questions. Carol, I wanted to come back to the timber transaction. I just want to make sure that I had a good holistic on. You're going to be making a payment of roughly $600 million. Has that already occurred or will that be occurring in the fourth quarter?

Where will we see it? I'm assuming we're going to see in the balance sheet and debt. And for making a payment, you defer the tax, which is -- you defer payment on the tax of $1.4 billion for as much as five years, and perhaps as much as 15 years. Would that be fair and what else have I left out or mischaracterized?

Take the first question. Yes, the cash went into the structure this quarter -- or last quarter. So that's done. And what you will see on the balance sheet, George, is going to be simply -- you'll actually see the cash go away from the cash line and then you'll see on the asset side, you'll see the assets from special (inaudible) and then down to the liability side, you'll see the other side of the equation, the non-recourse financial liability of it.

So that's what you'll see on the balance sheet, so you'll see $4.85 billion up in assets and then you'll see the $4.2 billion down in the liability line, and the delta is the cash that we've put into the deal essentially. That's the simple way to think about it

Okay. And in turn, you'll defer the taxes for at least another five years, perhaps as much as 15? Is that correct?

Yes, and if you go back to the structure, the structure was for 30 years total, so we did the first 10, and the way the original deal with structured, it was 10 with four five-year extensions, which got you to the total of 30. So this first one is for the first five and then that gives us the option at the end of this five for three more five years or another 15 years.

Okay. Thank you that's clear. As I mentioned earlier, I appreciate the detail, particular slide 9 and slide 15 on the capital allocation. My other question, just --a lot of them have already been asked -- as you look at supply/demand, again, in paperboard, broadly, and realizing that you're going to run your system as always, to demand, some of your competitors, one of your larger ones in South America has talked about ramping up their own boxboard production.

Then in Europe, one of your larger global peers, if you will, has talked about bringing on one of their large conversion projects a little bit earlier than expected. None of this is new news, but has that changed at all your outlook in terms of being able to supply the market, or you're seeing a bit more competition in these markets as a result? Thanks, guys.

George, that's a great question. The paperboard market does have a global element to it depending on the type of product. We've been managing these shifts and changes in the different geographies and the type of product used. We make SDS in the US, but we make folding boxboard in Europe.

We obviously take all of that into our thought process around how we're going to make, what were going to make, and where were going to make it. As Mike mentioned, a portion of our value proposition is that we provide products really on the high-end of the paperboard product spectrum to really, really good converting customers, and then on the cup side, we are one of those really, really good converters that provide the final product.

So I wouldn't saying of those announcements or changes or intentions that you mentioned create an immediate reaction into IP's plans, but we consider them. But our position in this market, we feel pretty good about, in terms of the customers we have, the converting we do ourselves, and the competitiveness that we have both on a cost of product side. So we'll keep watching the market that we play in, but that's how we look at it.

Mark, the Varkhaus project also, that hasn't changed your outlook at this juncture? That was part of my oblique reference there before? Again. Thanks. Good luck in the quarter.

Thanks, George.

Debbie Jones, Deutsche Bank.

Hi, good morning. I wanted to ask about Brazil, your guidance on sideboard. It's always interesting when you see Brazil listed as stable in packaging across the board. I just wanted to get your thoughts on, one, do you think there's opportunity for pricing to be a benefit, just given that you've seen some announcements out there for the fourth quarter?

And then two, just operationally, should we be looking for more improvements, either coming into the fourth quarter or into 2016, because you've mentioned in the past that you'd like to take out some cost in that operation?

Debbie, that's a good question. The Brazil packaging business. Carol highlighted the paper business and the business model in paper is different. We export about one-half of what we make, so we have a different profit model. The box business is all about the Brazil economy and the negative 2.5% GDP is a negative 2.5% box demand.

That is the challenge. The demand is soft, inflation is up, and we've struggled to recover that with pricing. We're starting to see some price movement, but the first time you try to really get something in is the hardest, in an inflation environment that has a demand declined. So our view on that business right now is we realigning our manufacturing assets and taking out the cost we talked about.

And we're repositioning ourselves for the best place we can participate commercially, so there's been some customer turnover, we were doing some things we probably weren't the best suited to do. We are replacing some of that business with business we're more competitive on.

It's going to be a work in process. Be great when we get Brazil back to a plus 2% or 3% versus a minus 2.5% because it will definitely help with the business performance.

Okay, thanks. If I could just ask a follow-up on pension expenses. Are you able to comment at all -- I'm just looking at 2016 -- based on how your assets have performed and rates, if we should see an incremental pension expense in 2016?

Debbie, we don't anticipate a required pension contribution in 2016.

Dr. Mark Wilde, BMO Capital Management.

Good morning, Mark. Good morning, Carol. I have a question and a follow-on. The question really is, on the EBITDA targets that you've set out in the past at investor days, both in terms of the level and in growth rate, do we need to rethink those, and if so, how are you thinking about them?

Those targets, we've talked a lot about. The Company is quite a bit different than it was when we set the target back in 2012, so the intent is to maximize the EBITDA potential of the Company we have. Obviously, growing EBITDA is a part of creating value over the long-term.

So that will stay in our targets and goals. We aren't prepared to throw another target out there at this moment in time, but rest assured, part of what we talked about doing was creating value over time. It had an EBITDA number, it had a margin number, and it had a return number. We're hitting on some of those but we've obviously been short on the EBITDA line.

Okay. Then Mark, if I could, just a follow-on. Your comments around China and what you were hinting at, in terms of potentially India, about being a fiber exporter rather than being a manufacturer in the country, over time, exporting pulp and containerboard has been one of the most volatile segments of the business. Can you just help us weigh that element of your strategy with the volatility that historically has come with it?

The serving of markets that have a growth profile but may not have a raw material or natural resource advantage is never going to be the primary business of International Paper. It's probably not the primary business of most forest products companies, but it is a very good way to use fully your assets, turn those assets at the highest level, and generate tremendous cash.

The volatility is something you can manage when the base of your business is, as is in the case to most forest products, you make it and use it in the same region. So this isn't a shift of being a global exporter or anything, this is just saying, we have the best chance to serve these markets with the lowest-cost, highest-quality products, and they need the products. So there's a win for our Company and there's a win for the local producers who may just want the resource to do the conversion themselves. That's how we look at it.

Okay that's really helpful. Thanks, Mark, and good luck in the fourth quarter.

Thank you, Mark.

Anthony Pettinari, Citi.

Good morning. Just circling back to North American containerboard, you have a slide that shows you closing the volume gap with the industry, but it seems like the erosion and box prices or price mix that you saw in 3Q stepped up a bit from 2Q. I was wondering if you could just give some color on the competitive market conditions you are seeing in North American box markets and maybe reconcile the expectation for flat pricing in 4Q with what seems like a tougher box market, if that's accurate?

Hey, Anthony, it's Tim. The box market is always competitive, but having said that, the price mix, there was more mix in the number than there was price. Given, we have huge swings from month-to-month and quarter-to-quarter sometimes based on seasonality, and so the market feel pretty stable to us.

Okay. That's helpful. And then just circling back to China and potentially serving China from Russia, I'm guessing adding kraft liner capacity at Ilim will be pretty attractive, given where the rubel is. But on the other hand, obviously the risk of doing business in Russia seem pretty elevated right now.

Mark, I was wondering if you could contrast those two things in terms of future investments in Ilim, especially on kraft liner side versus the geopolitical risks in Russia?

Anthony, that's a great question. On the first part, we're not potentially supplying China from Ilim. It is a big part of what's happening today and has been happening very successfully. Of course, it's back to what I said earlier. There's a raw material renewable natural resource advantage and a high-quality, low-cost manufacturing operation that's located adjacent to a needing and growing market.

We do make some containerboard in Ilim today, and it's obviously one of the best places in the world, given the softwood profile, to make kraft liner. Ilim is a publicly traded company. We have a 50% position in it. They have a strategic plan. They are working that.

Right now, our focus at Ilim is to operate the first phase of what we've done with the market pulp operations at Bratsk and the improvements we made in the Western Russian operation that serve the Russian market and we're doing quite well on that.

On the geopolitical thing, I was there last week. Our view on some of these things is a very long-term view, and political issues come and go and we have very good partners. We have a very good access to the people we need to and the government and we feel like our business is sustainable over the long-term. We're obviously mindful of the issues that are going on in and we hope to work through those and hopefully the business environment transcends the political environment, which it has in many cases in many parts of the world over time.

Steve Chercover, D.A. Davidson.

Good morning. The pressure is on. The first question, I've noticed over the last five years, your distribution expenses as a percent of sales have gone from 5.2% in 2010 to 6.4% last year. Is there anything you can do to stop this steady progression?

Yes, I'm actually glad, Steve, you pointed that out. It's something we've been talking about. It was a big reason for our supply chain investments we made, both on the people side and on the technology side over the last several years. We've mitigated what would've been a worse situation.

We also changed the way we think about the full supply chain, including our inventory position in certain businesses. But we've got to use what we call in our Company, [ME] as a set of tools that really are focused on lean manufacturing techniques, take waste and variability out, and challenge what we're doing and how we deliver our product.

Because I remember when I started working in this industry, it was the [rounding error] and today, the cost to get our products to market safely and reliably is at a level that it becomes a strategic issue to manage. So we've got a lot of really good people on it, we've invested in capability, and so we are making a difference. That 6%, in many cases, would've been completely out of control, had we not intervened, but it's something we work on every day.

Yes, thanks. $1.5 billion is not chump change.

Not at all.

Couple for Carol, I suppose. The share purchase activity in the quarter, as I see it, seem to be pretty much limited to the program and not much more, so I'm wondering whether the exit from the Sun joint venture precluded you from being more aggressive?

Steve, as we said, our share buyback program will continue to be opportunistic and it will be a combination of how we're seeing the value, as well as the cash available at that point in time. So there's no less focus on or importance on that. As we go forward, we'll just continue to watch our actions on that.

Okay, and final one. What prompted the increase in the dividend payout ratio? Clearly we're happy. Does it reflect maybe a little bit less of an ambitious acquisition strategy?

Steve, our dividend payout policy really is based on our confidence of sustainable cash flow generation. We do that with a trough tests where we look at conditions that are -- that reasonably could go wrong and are we comfortable at 40% to 50% of our cash flow and does it stand the test of our internal trough testing?

We adjusted our trough condition based on new information about our businesses and how they are running and what the competitive positions are. That led us to feeling we could go from 30% to 40% to 40% to 50%. It's really about that more than it is about what it says about other uses of cash or the other elements that Carol covered in our capital allocations.

We feel real good about the cash generation potential of the Company and that we should return a significant portion of that through a dividend to our shareholders. We think we can do that at the 40% to 50% rate.

Terrific. Okay. Happy holidays to everyone. We will speak to you in 2016.

All right. Thanks all for taking the time to join us this morning. As always Michele and I will be available after the call for any additional questions you have. Our phone numbers are on slide 20 of the presentation. Have a great day

Thank you. This does conclude today's conference call. All lines may disconnect at this time. Thank you.